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The United States has told China that it expects a revaluation of the yuan within six months. This comes on top of moves to limit the import of Chinese textiles into the United States and discussion in Europe of a similar move. In response, Chinese Premier Wen Jiabao said May 16 that China's exchange rate is the concern of China, a sovereign country, and that Beijing will not bow to foreign pressure to let its currency rise.

The pressure of Chinese exports on the United States is becoming unsupportable. Economists like to think it's all about economics, but it isn't, except in a particular micro way. Export surges do not affect all Americans similarly: Some are enriched by it, others benefit from lower-priced exports, and still others can be completely devastated. Economic effects are not equally distributed, but are confined to particular sectors and regions.

In economic theory  or fantasy  the ideal solution is to accept the low-cost imports, abandon the affected industries and move on. In the long run or in some moral sense, that might be a good idea. In reality, though, that just isn't how the world works. Those who are being devastated do not respond at the economic table.
They move to the political table, where they bring pressure on the government to protect them.

For a small group that profits immensely from China trade, there is a motivation to fight back. For the vast majority (think Wal-Mart shoppers) who enjoy Chinese exports, the motivation on an individual level is much smaller or nonexistent. But if the size and strategic position of the major losers reaches critical mass, the government will start shifting policy. That is what is happening now, and it was unavoidable.

The dilemma is that the Chinese have their own problems. Logically, they could defuse the situation by reducing export pressures on the United States: They have a huge economic pie, and they could give up a bit. Except that they can't. The Chinese financial system is a shambles, and Beijing needs the massive outflow of exports to support the system. In this case, while cutting exports makes political sense, it doesn't make economic sense. Not only can China not reduce the export surge, Beijing wants to increase it. Plus, it has its own sectoral and regional problems. Unemployment has caused substantial unrest in China; exports keep people at work.

Now, the pressure from the United States is not nearly as great as it looks. Giving China six months to revalue is the same as giving it forever. Who knows what things will look like in six weeks? Put another way, the Bush administration told the Chinese that they have six months before they have to do something. The administration does not want a confrontation with China, so Washington made a nasty face at the Chinese and gave them a long deadline.

But the administration is not in control of the situation, and neither are the Chinese. Political pressure is mounting for President George W. Bush, and he is not strong enough to resist it. He has other places to spend his political capital. Beijing is not in control of the situation, so it cannot cut exports or revalue the yuan easily. The two major powers have limited room for maneuver.

The Chinese do not really believe the Americans will take effective action. The Americans cannot believe that the Chinese won't, in the event, revalue. Both may be right. Some revaluation is possible, and U.S. trade sanctions rarely bite. There are too many other ways to sell things to the United States  say, through Europe as repackaged goods.

What is important now is to compare the economic atmosphere of a year ago to the atmosphere today, and observe the trend lines. The situation is deteriorating, and things are being said at the official level that never would have been said a year ago. This is getting interesting indeed.

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George Friedman is chairman of Strategic Forecasting, Inc., dubbed by Barron's as "The Shadow CIA," it's one of the world's leading global intelligence firms, providing clients with geopolitical analysis and industry and country forecasts to mitigate risk and identify opportunities. Stratfor's clients include Fortune 500 companies and major governments.